Coming up with a down payment to buy a home purchase can be difficult. But a down payment is an integral part of securing a mortgage. Today Canadians have to come up with at least 5% down when applying for a mortgage. If saving up for this kind of money proves to be a challenge for some homebuyers, in some cases borrowing the finances could be an option. Borrowing a down payment for a mortgage in Canada appears to be a growing trend in the country. What type of options exist for those who are unable to save up enough for a down payment in order to secure a home loan? Here are a few down payment borrowing sources for Canadians to consider looking into.

Line of Credit

A line of credit is a loan product that doesn’t work like a typical loan. Instead, it works somewhat like a credit card in which you withdraw funds on credit – up to your assigned limit – and pay interest only on the portion used. Once that money is paid back, you can borrow that money, again and again, paying only interest on the amount withdrawn. Can you use a line of credit for a down payment? Yes, but it cannot be from the same financial institution that the mortgage is being obtained from. Homebuyers may borrow against their line of credit in order to get the money needed to come up with a decent-sized down payment for their mortgage. However, this option should be used with caution in order to reduce any risk associated with overleveraging.

Personal Loan

A personal loan may be an option as a source of down payment funds, but usually only if your credit score and financial history are healthy. That’s because a lender will want to ensure that you are financially capable of handling additional debt, especially if you’re planning to take out a mortgage for a home purchase. Unsecured debt – which is what a personal loan is – can be risky for lenders when loaning out money to consumers who are not in good financial standing. If there is no collateral for the lender to collect if you ever default on your loan, they could be left with a bad deal. That’s why lenders will insist on borrowers having stellar credit, a high income, and a reasonable debt load before they approve a personal loan on top of a mortgage.   If you are considering taking out a personal loan to borrow for a down payment, something to keep in mind is that this will add to your debt and affect your debt-to-income ratio.

RRSP’s

The federal government offers down payment assistance in the form of the Home Buyers’ Plan. This program allows Canadians to borrow as much as $25,000 from their RRSPs ($50,000 for a couple) to be put towards a down payment on the purchase of a home. The great thing about this plan is that you have 15 years to repay your RRSP funds before being taxed on it. If you pay back all the money borrowed before this 15-year period is up, the funds are non-taxable.

There are eligibility requirements for the Home Buyers’ Plan. You must:

• Be a first-time homebuyer
• Sign a purchase agreement on a qualifying home
• Be a Canadian resident
• Designate the property as your principal home no longer than one year after buying it

In addition, the RRSP funds being used must be on deposit for a minimum of 90 days before borrowing.

Ideally, you should take the time to save up for a down payment on a home without having to borrow funds. That said, it can be a real struggle to come up with the amount of money needed for a decent down payment amount. When all else fails, there are ways to borrow the funds needed to come up with a down payment for a home purchase. Just be sure to speak with a financial advisor or mortgage specialist before choosing which route to take to make your dreams of buying a home a reality.

If you do not qualify for traditional financing all is not lost, since you may be eligible for an alternative – or private – funding.

Mortgage professionals often have access to private investors who are willing to lend money to BFS individuals looking to obtain mortgages. Although you will pay a higher interest rate – on average about 12% – this route may enable you to acquire funds to purchase a home.

It’s also important to note that there are added fees involved with private funding because the deals involve a higher degree of risk. The combined lender/brokerage fee will depend on the specific deal and the risk it poses, but the figure will be disclosed upfront so you know exactly what you’ll be expected to pay for these services.

Another key point to consider is that private financing is equity-based, meaning that the lender’s decision will be based on a specific piece of real estate. Private lenders want to know that the property is marketable and that they will be able to easily sell it should the mortgage go into foreclosure.

What exactly is alternative financing? Alternative finance refers to forms of finance that are outside the institutional finance system of banks and capital markets. ‘Fintech’ is the ecosystem within alternative finance made up of companies, technology, and processes that aim to improve traditional methods of finance in categories such as:

• Payments and invoicing
  
• Consumer lending and credit
  
• Small business lending and credit
  
• International money transfers
  
• Equity financing and crowdfunding
  
• Insurance
  
• Consumer banking
  
• Wealth management
  
• Savings and investments
  
• Capital markets
  
• Risk management
  
• Regulation management
  
• Cryptocurrency and blockchain

The decision to choose a fixed or variable rate is not always an easy one. It should depend on your tolerance for risk as well as your ability to withstand increases in mortgage payments. You can sometimes expect a financial reward for going with the variable rate, although the precise magnitude will ebb and flow depending on the economic environment.

Fixed-rate mortgages often appeal to clients who want stability in their payments, manage a tight monthly budget, or are generally more conservative. For example, young couples with large mortgages relative to their income might be better off opting for the peace of mind that a fixed-rate brings.

A variable rate mortgage often allows the borrower to take advantage of lower rates — the interest rate is calculated on an ongoing basis at a lenders’ prime rate minus a set percentage. For example, if the prime mortgage rate is 5.5 percent, the holder of a prime minus 0.5 percent mortgage would pay a 5.00 percent variable interest rate.

As a consumer, the best option is to have a candid discussion with your mortgage professional to ensure you have a full understanding of the risks and rewards of each type of mortgage.

What is equity and how does it work? Home equity is the difference between the value of your home and how much you owe on your mortgage. Home equity is the difference between the value of your home and how much you owe on your mortgage. For example, if your home is worth $250,000 and you owe $150,000 on your mortgage, you have $100,000 in home equity.

Your home equity goes up in two ways:

• As you pay down your mortgage
• If the value of your home increases

You may be able to borrow money secured against your home equity. Interest rates on loans secured against home equity can be much lower than other types of loans. Financing for equity will look different from a mortgage loan. Your mortgage broker will be able to go over with you which financing options are available for home equity loans. You must go through an approval process before you can borrow against your home equity. If you’re approved, your lender may deposit the full amount you borrow in your bank account at once.

Other financing options to look at in refinancing your home would be a refinancing loan, a second mortgage, a HELOC, or a loan or line of secured credit within your home. Something to keep in mind with refinancing, you may find that the interest may be different than the part that is on your original mortgage. You may also find that you have to pay a new mortgage loan insurance premium.

When you and your mortgage broker go over the option of a second mortgage, some points that you will find about this option are that you are able to borrow up to 80% of the appraised value of your home, minus the balance on your mortgage. The loan is secured against your home equity. While you pay off your second mortgage, you also need to continue to pay off your first mortgage.

A HELOC is very similar to a regular line of credit. You have the ability to borrow money when needed, up to the credit limit amount. You are able to take the money out of the HELOC, when you pay it back you are able to borrow again. This is a secured line of credit against your home. The interest rates are variable, they will change as the market interest rates go up or down.

One last option to look at when borrowing against your home is to borrow on amounts that you prepaid. If you have previously made lump sums on your mortgage, your lender may allow you to re-borrow that money. You can borrow the total amount of all the prepayments you have made. Any money you re-borrow will be added to the total of your mortgage. With this option, you will pay either a blended interest rate or the same interest rate as your mortgage on the amount you borrow. A blended interest rate combines your current interest and the rate currently available for a new term.

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Just like regular housekeeping, looking at your finances is something that needs to be regularly done if you want your finances to be in order and shining. Schedule some time once a week to look over budgets and review your goals to see where you are with what you have in the bank – and what you’re trying to achieve.

Overspending can be prevented with a regular review and clear out of your finances. Can you reduce paying for apps or streaming services that you just don’t use anymore? Do you know how much you spend each week eating out or over buying groceries for your home that end up in the waste? Go through all aspects of your financial life and assess whether it’s working and if improvements could be made.

Budgeting gives you control when it comes to finances and is an essential part of financial housekeeping. Make sure you know what’s coming in every month – and that you’ve estimated your outgoings so that there are no surprises.

Regularly looking at your budget will keep you on track for your financial goals and have you feeling more secure in your day to day purchases. When you have an idea in mind of your goals, talking with a Mortgage Broker will help you to bring you close to knowing what small details you need to look at IE looking at what is going on with your credit, and other steps needed to achieve the end financial goal.

Your home is going to be the place that you create memories with your family and friends. Buying a home will build a financial foundation for your future. This can be an exciting time as well as a confusing time. We can help make the process feel much simpler as well as be a resource to help you make informed decisions at each stage of the buying process.

Step One: Is Home Ownership Right For You?

Buying a home is one of the biggest decisions you will make. A few questions to ask yourself are: What do you want in a home? What does your current financial situation look like? What are your financial and lifestyle needs?

Step Two: Are You Financially Ready to Own a Home?

Before you start looking for a home, figuring out how much you can afford is key! Your mortgage payment will be your largest expense however, there will be other costs you should be aware of. You won’t want to be caught off guard by any surprises. The more you are prepared financially as well as the more you know what that looks like, the smoother the process will be when you meet with your mortgage broker.

Step Three: Financing Your Home

The time has come to meet with your mortgage broker and talk about the different financing options and look and see if you are prepared to buy a home. The mortgage broker will discuss terms and interest rates and will go over what needs to be done to ensure you are approved for your mortgage, once you find your home.

Step Four: Finding the Right Home

With a clear picture of your finances and mortgage options, now is time to start thinking about the type of home you would like to buy. Look for a home that will meet your needs not just for now, but also 5 or 10 years into the future.

Step Five: Making an Offer and Closing the Deal

The final step! You have a mortgage that works for you and found a dream home that fits your budget. Now it’s time to put in an offer and close the deal!

Final thoughts with making your mortgage work for you, and common terms that your mortgage broker will go over with you are:

• Amortization period
• Payment schedule
• Interest rate type
• Mortgage term
• ”Open” or ”Closed” mortgage

For more information on the home buying and mortgage approval process please reach out to our team! We look forward to talking with you!

Have you wondered how working with a mortgage broker can make home-buying that much more of a personal experience? Buying a home whether it’s your first time purchasing, or you have been through the process a few times, you may find yourself looking to the banks first for mortgage options. When working with a mortgage broker you will find they can often offer better, and lower rate options. Another advantage is that they are not tied to one institution, therefore will have access to many different lenders.

A mortgage lender will take the time to look at your individual needs that you are looking for in the type of mortgage that will be the best fit for you and then connect you with the best lender to fit your needs the best. Your mortgage broker will help you to understand the interest rate, closing costs, and other details of each offer to find the best loan.

Brokerages are often smaller than banks. And if you work with a broker, it’s likely you’ll have more human-to-human contact as the two of you work through your loan application, giving that more personal experience to one of the biggest purchases you will make.

Pros of Using a Mortgage Broker

• More options
• Unbiased advice
• Convenience
• Free service
• Ease of access
• Lower rates
• Licensed